Having too much debt reduces a company's operating flexibility. So reducing long-term debt can help a business in the long run. Long-term debt appears in the cash flow statement under financing activities. This includes borrowings and payments. A business must weigh the decision to borrow against the company's future prospects. A heavy debt burden coupled with a sudden economic downturn could put a company out of business rather quickly.

Cash Flow

The cash flow statement is divided into three categories: cash from operating, investing and financing activities. A company with high cash flow from operating activities is in a better position to invest in the business and pay down debt, which is why this section receives a lot of attention from accountants, financial analysts and loan officers. Cash flow from investing activities reflects changes in a company's investment portfolio and capital expenditures, while cash from financing activities shows inflows and outflows from borrowing, paying down debt, equity issuances and dividend payments.

Long-term Debt

Long-term as opposed to short-term debts are those that have a maturity greater than one year. Examples of long-term debt include bonds, long-term notes, debentures and mortgage loans. A high debt burden leaves a company with little operating room, diverting management's attention from running the business. Analysts and banks look at the debt ratios, such as long-term debt to equity, as a key metric of solvency. A high ratio suggests that a company is too heavily indebted, increasing the chances that it may run into financial trouble. Other debt ratios include total debt-to-assets and interest coverage, calculated as earnings before interest and taxes divided by interest charges.

Reducing Long-term Debt

A business owner should weigh the negatives and positives of borrowing long term. Investors, bankers and analysts hold a negative view of debt, particularly when comparing businesses. So reducing debt is a favorable action. The main issue is whether there is sufficient cash flow to pay down long-term debt. An overly aggressive commitment to debt reduction chokes off cash to other parts of the business.

Insight

Cash flow is one issue that keeps many small business owners awake at night. Initially, long-term debt shows as a cash inflow, and interest payments show as an outflow of cash. Justification for assuming long-term debt is that doing so results in an improvement in the quality of your business. An example is borrowing to invest in an income-producing plant and equipment. If you decide to borrow over the long term, your decision to pay off debt should also be strategic. Another way to reduce your debt payments is to restructure the loan to lower your interest payments, making it affordable.